Singapore Strategy - RHB Invest 2016-03-08: Top 16 recovery plays stock picks (Part 1 of 3)

Singapore Strategy - RHB Invest 2016-03-08: Top 16 recovery plays stock picks (Part 1 of 3) OVERSEA-CHINESE BANKING CORP O39.SI  DAIRY FARM INT'L HOLDINGS LTD D01.SI  KEPPEL CORPORATION LIMITED BN4.SI  CAPITALAND MALL TRUST C38U.SI  CITY DEVELOPMENTS LIMITED C09.SI 

Top 16 recovery plays stock picks (Part 1 of 3)

  • OVERSEA-CHINESE BANKING CORP (O39.SI) 
  • DAIRY FARM INT'L HOLDINGS LTD (D01.SI) 
  • KEPPEL CORPORATION LIMITED (BN4.SI) 
  • CAPITALAND MALL TRUST (C38U.SI) 
  • CITY DEVELOPMENTS LIMITED (C09.SI)


OCBC (OCBC SP, BUY, TP: SGD9.60) 

  • Against such a backdrop of volatile financial markets, a slowing China economy and protracted weakness in commodity prices, we prefer banks with a liquid balance sheet, strong capital position and resilient asset quality. 
  • We like OCBC as it is closing the gap with peers with regards to its capital position. The 120 bps YoY improvement in its fully loaded CET1 to 11.8%, in our view, has removed concerns of the potential need for fresh equity. 
  • The bank has also been proactive in its review and control of asset quality. OCBC has classified some 14% of its offshore and marine exposures vs. DBS’ offshore and marine NPL ratio of 1% while very little of UOB’s oil & gas exposures have been classified. Still, its NPL ratio was a low 0.98% while LLC is comfortable at 123%. 
  • Key catalysts are a gradual rise in Singapore short-term interest rates, sustained recovery in oil price and better-than-expected fee income from wealth management and treasury businesses. 
  • Risks to TP include higher-than-expected credit costs and a sharper-than-expected slowdown in China and regional economies. 

Dairy Farm (DFI SP, BUY, TP: USD7.80) 

  • Underlying net profit in FY15 (-14% YoY) was negatively impacted by forex, as well as the poor performance in its supermarket/ hypermart division, which faced a margin squeeze. 
  • We believe there is latent potential in this retail giant, which remains untapped, and we remain positive on the company's drive for organisation-wide synergies in IT systems, private label products and introduction of fresh food distribution centres. For example, private label product volumes have already increased significantly. 
  • We expect profit growth to return to positive territory in FY16 and our TP of USD7.80 implies 21x FY16F. 
  • A key risk to our recommendation is the prolonged consumption weakness in key markets such as Malaysia and Indonesia. 

Keppel Corp (KEP SP, BUY, TP: SGD8.08) 

  • Market misconceptions sent Keppel below 0.8x P/BV when the oil price fell to USD28/bbl. Keppel is a conglomerate, not a pure oil & gas play, yet its stock traded with > 90% correlation to the oil price. 
  • Only a third of income and a tenth of book value are oil & gas related. Keppel derives only c.32% of its income from its offshore and marine division, and this division forms only 11.5% of its NAV. The high correlation with oil prices is therefore misplaced investor sentiment. 
  • 77% of book value in property division, market rebounding in China and Vietnam. Half of Keppel's earnings and three-fourths of its book value are property-related. It is experiencing a healthy rebound in its key overseas markets of China and Vietnam. 
  • Our SOP-based TP implies 10x offshore and marine earnings and impute a 35% discount to property book value. We believe this valuation is highly-conservative, given that peer SembMarine trades at >13x FY16F P/E. Its property book value is well shy of its RNAV, thus in effect we are discounting the true value of its property division by at least 50%. 
  • Keppel's 34 cent dividend is highly-sustainable, and should provide a healthy income for investors while waiting for a market sentiment recovery. 

CapitaLand Mall Trust (CT SP, BUY, TP: SGD2.29) 

  • CapitaLand Mall Trust (CMT) is poised to outperform the market this year. Not only it is exposed to the resilience of retail businesses, we think that the REIT shall continue to book in a positive rental reversion as we see an upward trend in its tenants’ sales last year. 
  • In addition, we think there is still room for CMT to exercise an opportunistic capital recycling strategy, given that it currently owns non-core assets such as JCube and Sembawang Shopping Centre. 
  • Recall that the REIT sold Rivervale Mall at an attractive cap rate of c.3.4% in the recent quarter. 
  • Key catalyst: Opportunistic capital recycling. 
  • Risks to TP: Weakening tourism sector and an uprising of eCommerce businesses. 

City Developments (CIT SP, BUY. TP: SGD9.22) 

  • City Developments (CDL) remains our Top Pick in the property space for its compelling valuations. 
  • Executive chairman Kwek Leng Beng sees the possibility of cooling measures being relaxed this year – in line with our view on the Singapore residential market. 
  • We like CDL’s strong balance sheet which provides huge investment opportunities in a period of market dislocation, and its ability to capitalise on available opportunities. 
  • CDL has rallied nicely for the past week. 
  • Key catalysts: We believe there's still upside ahead following its restructuring and next-generation succession story and expect two more rounds of PPS, namely the South Beach project and its industrial/retail portfolio in next 1-2 years. 
  • Risk to TP includes a protracted downturn affecting the capital values of its Singapore properties. 




Ong Kian Lin RHB Invest | Singapore Research RHB Invest | http://www.rhbinvest.com.sg/ 2016-03-08
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 9.60 Same 9.60
BUY Maintain BUY 8.80 Same 8.80
BUY Maintain BUY 7.80 Same 7.80
BUY Maintain BUY 2.29 Same 2.29
BUY Maintain BUY 9.22 Same 9.22


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